Market Analysts Talk Cautiously of Rally

By Jack EganBy Jack EganOctober 13, 1977

Is this year's deepening stock market slide about to turn into an all-out bear market rout?

No, says the overwhelming majority of analysts. They point to the continued strength of fundamental factors such as the upward trend in corporate earnings, evidenced by the third customer consults now beginning to pour out, and the still intact consensus economic forecast that 1978 will not be a recession year.

A number of analysts are advising clients that at least a technical market rally is due, and a few go so far as to predict a sizeable upward move in the next six months.

But for most the view is that while the risk on the downside is low - given the already historically sercurities - the possibility of a significant advance any time soon is equally slim.

Instead they see the market continuing to drift for quite some time as investors rotate their worries between interest rates, the nation's comtinuing trade deficit problem and the uncertain course of energy and tax legislation in the Congress.

There's nothing in terms of developments that would indicate the market has any reason to break out of this condition, says Morte Gordon, research director for the Dreyfus Corp, Group of Funds. At the same time Gordon believes the drop is not likely to go much further.

For the next six months, says Gordon, the market will probably come back a little from these levels. But it certainly won't be a market on a sustained upward move.

One factor, however, that Gordon says has not yet been fully discontinued by investors and which could send the market tumbling below 800 on the Dow Jones industrial average is a new speculative attack on the dollar - an attack that some analysts already see building as the implications of the continuing U.S. trade deficit sink in.

The current focus of market concern is the surging money supply and the Fed's recent efforts to get it under control which have sent short-term interest rates soaring in turn, and produced forecasts of higher long-term rates in 1978. But even on this front some analysts think the worries may be overdone.

The easiest way for the market to turn around would be for the money supply to be under better control and for the upward pressure on the dederal funds rate to ease, says Alexander Bing, research director for L.F. Rothschild, Unterberg, Towbin.

"We think there is a fair chance of that happening sometime in the fourth quarter, and that would, other things being equal, trigger a rally in the stock market," he adds, with a 100 point rise on the Dow "a reasonable objective."

"But were the market to move up as I have suggested, which is a reasonable prospect. It would be a limited affair."

One analyst who leans decisively towards optimism is Gary B. Helms, chairman of the investment committee at Loeb, Rohades and Co. who is impressed by the numerous values he currently sees in the market and feels that a widening of this perception could happen with a flash, making an absolute buying panic possible.

Clearly the market can keep drifting and it does seem to be anticipating a major disaster, says Helms, either a serious weakening in the dollar or a return to the worst of both worlds - stagflation.

But the fundamentals just don't hear it out, he adds, and notes that for only the third time in the last 50 tears, the 30 Dow Jones industrial stocks are selling at below their combined book value.

"We're rapidly reaching a point where even a recession doesn't matter anymore, book value tends to be the floor," says Helms. He predicts that the market can't fall much below 780 on the Dow.

Helms, meanwhile, believes that the bargains that have caused companies to make takeover tender offers well above the market price for many firms will finally seep into investor consciousness and could trigger a sizeable rally.

Like a number of other firms, Loeb, Rhoades has recently shifted its research strategy away from nearly sole preocupation with following favorite stock groups to scouring the lists for unheralded companies with solid earnings histories, healthy balance sheets and low valuations that he thinks have the greatest potential to appreciate in the current market evironment, especially if they become takeover candidates.

Echoes Bing of L.F. Pothsohild: "using the term special situation loosely. I think it continues to be a market that is very risk adversavery interested in value, very interested in sustainable earning power, extremely interested in takeovwr candidates, and I don't see that changing for a while. So all of this argues against taking a doctrinaire view about this group or that group, but rather for looking for individual securities."